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Refinance Considerations

When you’re making your decision, there are several things to keep in mind.

First, even a small rate cut can pay off quickly. That’s because you can easily find mortgage companies willing to waive routine refinancing charges such as application, appraisal and legal fees (which can add up to $1,500 to $3,000). Of course, in exchange for low or no up front costs, you’ll have to be willing to accept a rate that’s somewhat higher than the prevailing rock bottom.

Second, if you are planning to stay in your home for at least three to five years, it may make sense to pay “points” (a point equals 1% of the loan amount) and closing costs to get the lowest available rate.

And third, you can avoid laying out cash and still get a low rate by adding the points and closing costs to your new mortgage. Does that mean shouldering a lot of extra debt? Not necessarily. If you’ve had your current mortgage for at least three years, you’ve probably reduced your balance by several thousand dollars. So you may be able to tack your closing costs onto your new loan and still end up with a mortgage that’s smaller than your original one — plus, of course, a lower rate and lower monthly payment.

Mortgage Refinance Costs

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage. These can include settlement costs, discount points, and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this. The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. To obtain the lowest rate offered, most mortgage companies will charge several points, and the total cost can run between three and six percent of the total amount you borrow. So, for example, on a $100,000 mortgage, the company might charge you between $3,000 and $6,000. However, some companies may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher.

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Build Home Equity Faster

Many borrowers use a refinance to shorten the term of the mortgage. And brace yourself, even at low rates, a shorter term means a higher monthly payment. The benefit is that you’ll build up equity faster and pay far less in total interest over the life of the loan.

Consider Jim Neill, 48, a real estate broker and his wife Merrilyn, 55, a psychotherapist. Recently, the couple took out a 15-year fixed rate loan at 6.75% to replace an 8.13% ARM with a 30-year term. Their monthly payment jumped by $200, but now they will own their own home outright by the time they retire. In addition, the total interest on the 15-year loan will come to $95,447, vs. $222,234 on the remaining life of the ARM — and that assumes their adjustable rate would have held steady at its current 8.13%. “This is forced savings,” says Jim. “When we retire, we can scale down and take equity out of the house.”

If you can’t afford the payments on a 15-year mortgage, your next best means of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan’s term to match the years that are left on your old loan — if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.

An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights he intends to appraise. The appraiser does not create value, the appraiser interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. An appraiser may spend only a short time inspecting the property, however, this is only the beginning.

Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.

Due to the many types of value, such as fair market value, insurance value, tax value and value in use, the need to precisely define the purpose of the appraisal is essential.

Appraisal Methods

An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market.

The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.

The comparison approach to determining value makes use of other “benchmark” properties of similar size, quality and location that have been recently sold. A comparison is made to the subject property.

The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.

Helping the Appraiser

Once you have selected an appraiser, be prepared to answer questions and provide requested information such as:

What is the purpose of the appraisal?

When is the required completion date of the appraisal?

Is the property listed for sale and if so, for how much and with whom?

Is there a mortgage? If so, with whom, when was it placed, for how much, type of mortgage [FHA, VA etc.], interest rate, and are there any other types of financing.

What personal property, such as appliances, are included ?

If it is an income producing property, a breakdown of income and expenses for the last year or two and a copy of leases.

A copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.

A copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].

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Research Interest Rates

Begin by checking out current interest rates and rate movements when shopping for a mortgage. Mortgage rates generally rise and fall along with Wall Street securities and generally reflect the overall direction of interest rates. By keeping an eye on mortgage market trends and key economic indicators, a borrower has a better chance of obtaining interest rate savings.

What is APR?
A tool used to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates.

Lock in Your Rate
A lock in, also called a rate lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.

A good credit background that indicates your payment history or “willingness to pay”

Sufficient appraisal value, which shows the house is at least equal to the purchase price

In some instances, a cash reserve equivalent to two monthly mortgage payments

Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live.

Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner’s insurance, appraisal fee, lawyer’s fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.

Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points in upfront costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.

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